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July 31, 2008

Dear Client and Friends,

Second Quarter 2008 Financial Asset Performance

The Lehman Brothers Aggregate Bond Index was down 1%. The S&P 500 U.S. Stock Index, a representative index of large companies, was down 2.7%. The Russell 2000, a representative index of small companies, was up 0.6%. Foreign equities, as represented by the MSCI EAFE Index, were down 2.2%.

We have included a Morningstar table of performance figures for many of the mutual funds in your portfolio plus some comparative market indices noted by the prefix “Idx”.

Investment Commentary

The technical definition of a recession is two consecutive quarters of negative economic growth as measured by the country’s Gross Domestic Product (GDP).

Real (inflation adjusted) Gross Domestic Product, the output of goods and services produced by labor and property located in the United States, increased at an annualized rate of 1.9 percent in the second quarter of 2008 (that is, from the first quarter to the second quarter), according to final estimates. In the first quarter, real GDP increased 0.9 percent.

Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

There does seem to be negative momentum in the economy which could result in negative GDP numbers for the quarters ahead. However, while it may feel like a recession, technically we are still experiencing a period of slow growth, not negative growth. These technical definitions have real value, since without them we would be quick to label any period of economic anxiety a recession, justified or not.

That being said, there is no doubt that we are in a funk and there is some real pain being experienced by many individuals and industries. As noted in our letter dated January 17, 2008, “Someone once said that a recession is when your neighbor loses his or her job; a depression is when you lose yours.” If, for example, you are in a business tied to the fortunes of the real estate industry or in a business that relies on non-essential spending, such as the restaurant and travel industries, these are very tough times.

It is going to take additional downward price adjustments to work the excesses out of many real estate markets. How soon those adjustments are made will determine when the bottom is reached and when recovery can begin. Increases in energy and food prices present their own unique challenges. While there has been an increase in demand for energy and food from developing countries, that alone cannot explain the explosive increase in prices over the last couple of years. There is currently a debate about how much Wall Street is to blame for the rise in commodity prices. At least some members of Congress believe that the increase in commodity options trading has had a direct impact on underlying commodity prices. As a result, legislation is being proposed in an attempt to curb this activity. For some compelling background information, we refer you to the May 2008 Senate testimony of hedge fund portfolio manager Michael Masters. (http://hsgac.senate.gov/public/_files/052008Masters.pdf)

The average length of all economic expansions in the U.S. since 1900 has been 45 months. The average length of recessions has been 14 months. Since 1948 there have been ten recessions with an average length of ten months. U.S. stocks, as measured by the S&P 500, averaged a 1.4% return during the recession and 10.6% during the subsequent six month rebound. (Source: JPMorgan Market Insight)

While we recognize that this has been a difficult year for U.S. and foreign equity market performance, we are pleased at how investments in other sectors incorporated in your portfolios have helped weather this financial storm. It is important to remember that the U.S. does not need to be the sole engine for global economic growth. There are increasing numbers of people rising to middle class status in a number of emerging market countries. Their ability and willingness to consume in the future will help mitigate the effect of slowing economies of the developed world. It has been and will continue to be a major focus of ours to keep this in mind in constructing client portfolios.

New Contracts

Challenging investment and economic environments and heightened volatility puts a premium on flexibility. We recently purchased state of the art software that increases our flexibility by enabling us to rebalance client portfolios over several different types of accounts (individual, trust, IRAs, Roth IRAs), taking tax efficiency and other objectives into account. Generating rebalancing trades currently consumes a significant amount of advisor time. The new software should increase our productivity and service. We are currently incorporating our investment rules into the software and testing it. In order to maximize its benefits, we have begun to send out new contracts and a sample Investment Policy Statement that will facilitate its use. We ask for your cooperation to promptly review the contracts, call with any questions, and mail a signed copy to us as soon as possible.

Ravi Makes Worth List of Top Advisors

Ravi was recently notified by the editors of Worth magazine that he made the 2008 list of the nation’s top advisors. This was Ravi’s first attempt in making the list, having met the minimum experience requirement of ten years.

We are extremely pleased that both partners in the firm have now been nationally recognized as top advisors. This is a significant accomplishment for any advisory firm, especially one of our size.

Wealth Manager Magazine Recognition

Our firm was ranked 163 out of 478 firms qualifying nationally for Wealth Manager Magazine’s eighth annual Top Dog listing published in July. To qualify for the list, firms have to be registered as investment advisors with the SEC, offer financial planning services, have at least 50% of their clients categorized as high net worth and must be independent. Advisors affiliated with banks, trust companies or broker/dealers were not eligible. Rankings are based on average assets under management.

New Hires

If you have called or visited with us during the past couple of months you know that we have added two new members to our service team.

Lauren Heydt earned a Bachelor of Science in Educational and Disabilities Studies from The University of Delaware and a Masters in Education from Wilmington University. She is responsible for administrative and support tasks integral in keeping our office running smoothly. Heather Cox provides important assistance in our operations and advisor support areas. Her computer and organization skills have already made a positive impact.

In addition to their skills, both Lauren and Heather have energetic and friendly personalities helping to create a warm and welcoming office environment. Please welcome them to our team.

It’s Official – Ryan Cross Marries Ivy Rosier

Please join us in extending congratulations to Ryan and his bride, Ivy, who tied the knot on Saturday, July 26. We have noticed that Ryan seems to have a certain glow about him these days. It could be the sun, but we think it’s Ivy.

We continue to work daily to earn your trust and confidence.

Best regards,

Vincent A. Schiavi, CFP®, CPA/PFS



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